ION Geophysical Corporation
Q4 2017 Earnings Call Transcript

Published: 9 Feb 2018

[Operator:]

Greetings, and welcome to the ION Geophysical Fourth Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rachel White, Vice President of Corporate Communications for ION Geophysical. Thank you, you may begin.

[Rachel White:]

Thank you, Donna. Good morning, and welcome to ION's Fourth Quarter 2017 Earnings Conference Call. We appreciate your joining us today. As indicated on Slide 2, our hosts today are Brian Hanson, President and Chief Executive Officer; and Steve Bate, Executive Vice President and Chief Financial Officer. Before I turn the call over to them, I have a few items to cover. We'll be using slides to accompany today's call. They are accessible via a link on the Investor Relations page of our website, iongeo.com. There you will also find a replay of today's call. Moving on to Slide 3. Information reported on this call speaks only as of today, February 8, 2018, and therefore, you are advised the time-sensitive information may no longer be accurate at the time of any replay. Before we begin, let me remind you that certain statements made during this call may constitute forward-looking statements, which are based on our current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control that may cause our actual results or performance to differ materially from any future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by ION from time to time in our filings with the SEC, including in our annual report on Form 10-K and in our quarterly reports on Form 10-Q. Furthermore, as we start this call, please refer to the disclosure regarding forward-looking statements incorporated in our press release issued yesterday. And please note that the contents of our conference call this morning are covered by these statements. I'll now turn the call over to Brian who will begin on Slide 4.

[Brian Hanson:]

Thanks, Rachel. Good morning, everyone. During today's call, I intend to spend some time on our fourth quarter and 2017 financial results, but primarily will focus on an operational recap of 2017 and will set the stage for our expectations in 2018. I will cover growth in multi-client programs, momentum on high-end imaging and E&P Advisors projects, progress diversifying our business into adjacent markets and commercialization paths for our new OBS technology 4Sea. As a practice, we do not extend guidance. However, I will share some thoughts around why we see 2018 shaping up to be a considerable improvement on 2017. If there are any additional topics you -- I could address, please feel to raise them in Q&A. First, let's discuss the financials. I'm pleased with the performance of the business, not only in the fourth quarter, but also for every quarter throughout 2017. Although the market recovery has been slow for many, our efforts over the last 2 years to follow select segments where capital is flowing, along with our asset-light strategy, has paid off. As a niche business in the larger E&P market, we surgically targeted select geographic areas and production optimization opportunities less dependent on cycle recovery and where our differentiated technologies delivered significant value. We stated in our third quarter earnings call that we expected the range for our fourth quarter results would be somewhere between, a, easily exceeding the second quarter on the low end; and b, comparable to the third quarter, potentially exceeding it or modestly coming in shy of it. The range was entirely driven by the amount of year-end funds available. Our fourth quarter revenue was on the high side of that range coming in at $58 million compared with $46 million in the second quarter and $61 million in the third quarter. The $58 million in revenue represents a 64% increase over the fourth quarter of last year. Our adjusted EBITDA for the fourth quarter was $24 million on the high end of the range we provided and 3.5x the adjusted EBITDA generated in the fourth quarter of last year. In addition, we have positive net cash flows from operations of $18 million during the fourth quarter of 2017 compared to use of $2 million in the fourth quarter of 2016. There was a special item in the fourth quarter of 2017 related to a $6 million charge associated with stock appreciation right awards, which Steve will elaborate on soon. In terms of our full year results, we had substantial year-on-year improvements driven by continued strong sales of our 3D multi-client reimaging programs as well as new 2D programs we launched in 2017. Our revenues of $198 million were up 14% compared to last year. In 2017, we did not recognize any revenue from ocean bottom seismic services, so a better year-over-year comparison would exclude ocean bottom revenues from 2016. Excluded our revenues of $198 million are up 45% from last year. Adjusted EBITDA for the full year was $64 million, a sixfold increase in what we generated last year. This is the first time since 2013 that we have reported 6 consecutive quarters of breakeven or better adjusted EBITDA. Net cash flow from operations was $28 million compared to $2 million in 2016. In our E&P Technology & Services segment, we ended the quarter with continued strong backlog of $39 million compared to $40 million sequentially and $34 million at the end of last year. As programs progress, they move from work-in-progress new venture programs to completed programs on the shelf in our data library. When this occurs, activity shifts from backlog to revenue recognized in the quarter it's transacted in. As we continue to complete programs and build our data library, we expect backlog to reduce, becoming a less meaningful metric moving forward. As a reminder, we sanctioned one program for the 2-year period of June 2015 to May 2017. In 2017, we launched 5 programs, which drove the increase in backlog and we expect it to level off as we build a consistent pipeline of new projects. This continued strong backlog should translate to good first quarter 2018 revenues in line with our potentially exceeding first quarter 2017. However, I caution that our customers typically are still figuring out their budgets this time of year, so the first quarter is typically the softest for us. Our diverse data library is exceptionally well positioned for upcoming license round activity. And as a result, we were direct beneficiaries of year-end spending. This quarter, new venture revenues increased to 174% and data library sales increased 85% compared to the fourth quarter of last year. This increase in revenue and sanctioned programs demonstrates a renewed interest in clients' underwriting programs to obtain data in advance of license rounds and to evaluate new discoveries. A majority of the increase in new venture revenues was a result of continued revenue from our 3D multi-client reimaging programs offshore Mexico and Brazil as well as revenues from new 2D multi-client programs that were launched in 2017. Multi-client revenues came from diverse geographic areas in Mexico, Brazil, Argentina, Nigeria, East Africa, the Mediterranean and across the Caribbean. We continued positive new program momentum in the quarter. Due to client demand and underwriting, we sanctioned the third phase of the Picanha 3D multi-client program offshore Brazil, and we finalized another extension to the Campeche 3D multi-client program offshore Mexico, now bringing that program to over 100,000 square kilometers. In 2017, we continued to benefit from our investment in multi-client data, generating solid growth in new venture revenues throughout the year. After 2 years of very little new venture activity, I'm excited, we launched 5 new programs in 2017, 2 3D multi-client reimaging programs and 3 2D multi-client programs offshore Gabon, Panama and Argentina. We had tremendous success with our 3D reimaging programs expanding our 3D data library from 8,000 square kilometers to over 165,000 square kilometers in just 2 years, in proven, mature areas, where capital is flowing. I'd like to reiterate that these multi-client programs have long-term demand and sales potential for many years to come. And you would like additional detail about any of these programs, I encourage you to read our third quarter transcript where we provided details on each one. Our imaging services group, which provides data processing services for both ION's multi-client programs and proprietary third-party projects, has continued to focus on higher value, technology-driven projects with better margins. The group remains fully utilized with a large portion of our capacity dedicated to multi-client programs. The proprietary work we take on is in the high end of the market, which keeps our cutting-edge technologies and skills sharp solving some of the toughest geophysical and imaging challenges. We continued investing in geophysical R&D in 2017, increasing momentum on our wave-based imaging technology, such as Full Waveform Inversion, or FWI, which delivers more detailed images to better understand reservoirs and optimize production. It's an industry-leading new approach to develop data-driven reservoir models that is already making an impact. For example, in 2017, BP attributed the identification of 200 million barrels of oil in its Atlantis field and an additional upside potential of 800 million barrels of oil in other Gulf of Mexico fields to higher resolution Full Waveform Inversion imaging. We are one of only a handful of companies on the forefront of this ultra-high-end imaging. Recognized as leaders in the ocean bottom seismic and FWI imaging enabled us to win and start executing multiple high-profile proprietary ocean bottom nodal imaging projects last year. Our E&P Advisors group, which expanded their focus in 2017 to more broadly advise host governments, oil and gas companies and private equity firms, completed the initial technical evaluation for their third license round management contract during the fourth quarter. In this host government advisory role, we evaluated the potential of distressed fields' rejuvenation as well as new exploration blocks to be offered in a major oil province. In the world of heightened competition globally to attract E&P investment, this advisory service is designed to help host governments promote their assets to attract maximum investment. As the result of the expanded scope of our consultancy work, we indicated last quarter that we expected greater services revenues in the short term and the success-based revenues to push out into 2019. We still anticipate the success-based revenues in the range of 4 to 7x 2017 service revenues. We are excited to provide this capability to governments as they maximize the value of their acreage and the share and the success we create. In our operations optimization segment, we maintained our core seismic software and equipment businesses, while pursuing additional opportunities for our technology in adjacent markets. For example, Marlin is expanding into the production segment offshore and devices is targeting scientific, military and robotics applications. Throughout 2017, we successfully defended our core software business against competitive threats. During the second quarter, one of our large, longtime customers went through an extensive evaluation of our towed streamer offering and partnership and recommitted to us on a long-term basis. In the fourth quarter, we renewed a major long-term contract and secured a new contract for our OBS software. In addition, we develop long-term technology road maps to keep our software and key capabilities leading edge. In 2017, we made a lot of headway in both executing deployments and developing the shrink-wrapped version of Marlin, our operations optimization platform. In 2017, Marlin deployments more than doubled with 39 new deployments across 19 projects, building a diverse portfolio of case studies where we drove increased efficiency and enhanced QHSE compliance across a vast array of operations. We have now successfully completed over 67 deployments of Marlin, bringing air traffic control like rigor, transparency and decision-support to complex Marine activities. The system integrates a variety of real-time data sources in the cloud that enables multiple stakeholders to share and visualize vessel route plans, 4Sea and avoid conflicts between vessels and fixed assets, optimize schedules and measure and improve asset performance. Throughout the year, we observed an increased emphasis on maritime digitization in seismic and other offshore markets we are pursuing. During the quarter, we signed up a second E&P company with our office-based version of Marlin for a long-term worldwide remote monitoring of their offshore seismic projects. These permanent installations of Marlin will provide a step change by centralizing oversight for hundreds of millions of dollars on operational expenditure covering the most remote outpost of customers' global operations. We made excellent progress in our E&P supply vessel operations offering in Marlin and are lining up pilot opportunities for the first quarter release of the shrink-wrapped software version with both supply vessel operators and E&P companies. We have also started assessing Marlin for adjacent markets outside of oil and gas, such as offshore wind farms, port management and harbor security. For example, we completed an exhaustive study on Marlin's applicability for wind farm management. The results of the study indicate Marlin is highly applicable for both the construction and ongoing operation and maintenance of wind farms. Our strategy includes engagement with the right partnerships in these markets to enhance our offering and to accelerate its adoption. As I've said before, we believe Marlin has the potential to develop into a very nice software business for ION. Our optimization services group, which delivers engineering and consulting services to help oil companies optimally plan and execute their offshore projects, doubled revenues year-over-year in large part due to the increase in Marlin deployments. In the devices group of our operations optimization segment, we're able to offset some of the decline in seismic revenues from selling new incremental offerings and selling existing technology to new customers outside the E&P space. During 2017, we commercialized 3 new technologies that provide valuable new capabilities for our Marine contractor customers, while leveraging their existing equipment. The first is DigiLIFT, a smart streamer recovery device that is coupled with our DigiBIRD to provide a more accurate protection against cable loss. The second is our acoustics and deployment software that enables customers to see real-time positioning of cables during deployment, retrieval and turns for safer, faster operations. The third is our new line of rechargeable batteries for our industry-leading streamer positioning systems. These will allow customers to recharge their batteries onboard, reducing hazardous, environmental waste and challenging shipping locations, logistics in remote locations. In addition, we are close to commercializing our SailWing technology, which is an innovative foil-based alternative to conventional bulky Marine diverters. SailWing has the potential to be a significant growth area for ION. SailWing can be employed to optimize towing configurations and source array positioning, yielding significantly less drag, faster towing, improve fuel efficiency and safer operations through their flexible and smaller footprint. In the fourth quarter, we had another successful field trial of SailWing, which met all objectives, and we are now moving into commercial tests with potential partners. In addition, we worked diligently to broaden and diversify our customer base for devices into adjacent markets. We sold existing technologies to new customers for use in scientific, military and academic applications beyond traditional seismic operations. We are particularly proud of the development effort to eliminate time-consuming calibrations for military diving platforms by incorporating our highly differentiated compass from a positioning solution. During the fourth quarter, we had successful field trials of our technology that demonstrated its accuracy and robustness in GPS-deprived environments, leading to our first commercial order. In our ocean bottom seismic services group, we introduced our new fully integrated nodal system, 4Sea, in 2017. We are confident that the OBS market is growing, projected to be at pre-downturn levels of $1 billion in 2018, with significant growth projected by the industry in the following years. OBS will continue to take market share from the distressed streamer markets spurred by the improved economics of the next generation of systems as well as growing adoption by E&P companies as a technology of choice to manage their reservoirs. In addition, we see OBS project starting to address the multi-client space as well as expiration projects held acreage. So we see a fundamentally healthy demand side. That being said, we see increased risk in the conventional supply side of deploying an operating crew, which is asset-heavy, with large amounts of capital required to bring a crew to market. This is against the backdrop where we are seeing low-cost providers entering the market, concentrating on a market share instead of returns and contractors taking more risk and operating on slimmer margins, driven by pressure from E&P procurement to simply take the low bid without any uplift for the investment in technology the contractors have made. Currently, we see as many OBS service providers as towed streamer companies today. At a time when companies are not receiving proper returns on investment and capital, it's reinforced the ingenuity of our asset-light approach as the correct one. For example, Schlumberger recently decided to stop providing acquisition services and is moving to an asset-like model similar to ION's. We have evaluated numerous possible commercialization paths for 4Sea and believe there are smarter alternative approaches to commercializing 4Sea to take our offerings more broadly to market, while staying true to what makes us successful being asset-light. We have settled on two business models to more successfully participate in this growing market moving forward. The first is making the individual components of 4Sea available more broadly to all OBS service providers on a value-based pricing model, allowing us to participate in the success we enabled. While the commercial availability of each individual component varies, we believe we could be in a position for external deployment with the first component in the second quarter of 2018. Examples of some of the components would be SailWing for the efficient control of source operations, a central data hub in imaging engine enabling extremely efficient onboard processing for timely data delivery and our sim survey tool enabling efficient survey design integrated with our Gator command and control software. The second approach is to license the right to manufacture and use the fully integrated system to a service provider on a value-based pricing model, such as royalty stream. We still believe our fully integrated system is the most effective in the market today, differentiated in its ability to deliver a step change in economics, QHSE performance and data value and a paradigm shift in final image delivery time, enabling enhanced E&P use for critical reservoir management decisions. We believe these two approaches will deliver a higher, more sustainable return over the long term for our shareholders. While the value-based pricing models, our primary route to market, we will continue to evaluate OBS opportunities on a case-by-case basis that meet our long-term risk and return thresholds. With that, I'll turn it over to Steve to walk us through the financials, and then I'll wrap up before taking questions.

[Steven Bate:]

Thanks, Brian. Good morning, everyone. Our total fourth quarter revenues were up 64% compared to the fourth quarter of 2016. Revenues in our E&P Technology & Services segment increased by 90%, and revenues in our Operations Optimization segment slightly decreased by 3%. Our OBS Services segment had no revenues in the fourth quarter of 2017. Within our E&P Technology & Services segment, our new ventures revenues were $30 million, an increase of 174%; our data library revenues were $15 million, an increase of 85%; and our imaging services revenues were $3 million, a decrease of 52% compared to the fourth quarter of 2016. Similar to past 2017 quarterly results, the decrease in imaging services revenues reflects the continued reallocation of resources to higher-return, multi-client programs. The imaging services group is fully utilized with 60% of our capacity dedicated to higher-return, multi-client programs. In our Operations Optimization segment, our optimization software and services revenues were up by 4%, while our devices revenues decreased by 7% compared to the fourth quarter of 2016. Overall, we reported a net loss for the fourth quarter of $1 million or $0.12 per share compared to a net loss of $6 million or $0.55 per share in the fourth quarter of 2016. Both periods included special items during the quarter, which, excluding those items, we had an adjusted net income of $5 million or $0.38 per diluted share in the fourth quarter of 2017 compared to an adjusted net loss of $12 million or $0.99 per share in the fourth quarter of 2016. The special item in the fourth quarter of 2017 related to a charge of $6 million, associated with our then outstanding stock appreciation right, or SARs, awards. The SARs program was launched in 2016 with the intent of keeping the management team highly focused on executing our strategy to drive the recovery in the stock price. They were both performance and time-vested and had us filling of $22.50 a share. Once that filling was hit, vested SARs came due for payment. The program had 3 tranches that vested 1/3 each in March 2017, '18 and '19. Because of the significant upward movement in ION stock price in 2017, we perceived a real possibility of the stock price hitting or exceeding $22.50 per share in the first quarter of 2018, which would have resulted in a cash obligation to ION of $13 million. During the fourth quarter of 2017, we accelerated divesting of the second tranche of our SARs rewards to facilitate the exercise of the first 2 tranches of SARs to minimize the cash exposure, dropping it from $13 million in the first quarter of 2018 to $6 million in the fourth quarter of 2017. Additionally, in order to encourage executive officers and other key employees to purchase ION common stock and further align their interest with those of ION stockholders, we launched an equity investment program that permitted these individuals to purchase common stock at market prices. Based on the continued rise in our stock price during the first quarter of this year, vesting these awards 90 days early saved us about $7 million of additional cash in 2018. Moving on, our income from operations as adjusted was $5 million during the fourth quarter compared to a loss from operations as adjusted of $8 million 1 year ago. Adjusted EBITDA was $24 million in the fourth quarter of 2017 compared to $7 million in the fourth quarter of 2016. This represents our sixth consecutive quarter with breakeven or better adjusted EBITDA. Net cash flow from operations during the quarter was $18 million compared to a use of cash of $2 million during the fourth quarter of 2016. Including both investing and financing activities, we generated total net cash flows of $12 million in the fourth quarter of 2017 compared to a consumption of cash of $10 million in the fourth quarter last year. While our total receivables declined during the fourth quarter compared to the third quarter, our total receivables were up compared to 1 year ago due to the significant increase in revenues. In total, our accounts receivable and unbilled receivables were $57 million at December 31, 2017, up $23 million from the end of last year. This increase in receivables should lead to further cash generation during the first quarter of 2018. Our liquidity was $68 million at the end of the fourth quarter, a $15 million increase from September 2017. Our cash balance, excluding borrowings under our credit facility, was $42 million at December 31. The $68 million in liquidity at year-end more than sufficiently provides a capital required to retire our third lien in ventures of $28.5 million, which matured May 15, 2018. We have already received verbal consents from a majority of our second-lien bond holders to retire the third-lien bonds early. And we have started the process to complete that this quarter. The combination of finishing the fourth quarter with $68 million in liquidity, potential to further harvest working capital in the first quarter, and our strong backlog heading into 2018 should further strengthen our liquidity by the end of the first quarter. With that, I'll turn it back to Brian.

[Brian Hanson:]

Thanks, Steve. Let's switch gears and discuss our outlook for the industry and ION. We are seeing increasingly positive signs of growth in recovery in the oil and gas industry. There is a growing consensus with the E&P market is in balance. Thanks to healthy global demand and continued production cuts. Inventory levels are declining and brent crude hit $70 in January for the first time in 3 years. As a result, market analysts are projecting E&P spending to increase 8% in 2018, following 4% growth in 2017 and preceded by consecutive years of double-digit declines. This is the first time in 3 years that international spending is expected to increase, where our offerings are more relevant. Offshore 2018 is likely to be the last of 4 consecutive years of double-digit declines. While those are significant declines, majority of those cuts were on large offshore production infrastructure, and we are still seeing capital flow to select proven areas offshore with acceptable return potential. As I stated at the beginning of the call, we do not extend guidance. However, I will now share some thoughts around why we see 2018 shaping up to be a considerable improvement on 2017. In our E&P Technology and Service Group, we have a strong comp for a potential multi-client programs and have already secured underwriting and sanctioned 3 programs for 2018. As a reminder, we launched 5 programs in all of 2017. As a point of comparison, entering 2017, we were working on six active programs. Entering 2018, we are working on 12 active programs and anticipate initiating another 5 to 8 programs during the year. Clearly, this acceleration of program activity is a great indicator of how 2018 is shaping up. In addition, our existing data library, is exceptionally well positioned for upcoming license round activity. 2018 is looking to be even better with more diverse interest and programs across the globe. There's been a significant uptick in offshore license round activity over the last year. We expect 109 active, announced or anticipated license rounds to start in the next 2 years. In fact, more than 84 rounds are active or expected to launch in the next 12 months. This includes 20 of the 33 offshore license rounds deferred to the downturn starting in 2014. I further indicated that the market is picking up. Our programs are exceptionally well positioned and relevant to 59 of the 109 active or anticipated offshore license rounds in 2018 and 2019. While our imaging and services group remains primarily focused on higher return potential multi-client programs, our proprietary projects are on the high end of the market. Our imaging backlog increased 2 quarters in a row and has had a healthy volume similar to levels entering 2017. Our proprietary projects with an ocean bottom component, account for 40% of our backlog and our wave-based imaging represents 70% of our backlog, positioning us optimally for the high-end imaging market in 2018 and beyond. We transformed our E&P Advisors team to provide services that help E&P companies host governments and private equity firms maximize value, sharing in the success we create. By 2019, we would expect the total revenue stream to be in the range of 5 to 8x 2017 service levels. In our Operations Optimization segment, we maintained our core seismic software and equipment businesses, while positioning our shrink-wrapped software version of Marlin to excel in the production sector of the E&P market and adjacent markets such as offshore, wind farms and supply vessel management. On the devices side, we commercialized incremental new technology that should positively contribute to 2018, and we're continuing to evaluate. Our existing technology is valuable in adjacent markets and scientific, military and robotics industries. Our goal in the Operations Optimization group is to drive a significant amount of ION's revenues in 5 years to non-seismic markets. The $68 million in liquidity at year-end more than sufficiently provides a capital required to retire our third-lien in ventures of $28.5 million, reducing our total indebtedness to $118 million, excluding our revolver. We've started the process and expect to complete it this quarter. With $64 million of EBITDA generation in 2017, and a clean balance sheet of only a $118 million of leverage or little less than 2x trailing EBITDA, we believe we have delivered significant shareholder value in 2017 and have positioned the company well for 2018. Finally, our continued strong backlog should translate to a good first quarter 2018 revenues, in line with or potentially exceeding the first quarter of 2017. However, I caution that our customers are usually still figuring out the budgets at this time of year, which is why the first quarter typically generates the least amount of EBITDA in the year. And for the past 3 years, it has been breakeven or worse. Generally, the majority of our EBITDA is generated in the back half of the year. We expect 2018 to be a significant improvement on 2017 results on a full year basis, but we'll not be surprised to see breakeven or slightly better EBITDA generation in the first quarter similar to 2017. With that, we will turn the call back to the operator for Q&A.

[Operator:]

[Operator Instructions]. Our first question is coming from David Steinberg of DLS Capital.

[David Steinberg:]

I have two questions, they're all related to ocean bottom seismic services business. Number one, I know it's zero now. I know you guys reclassified how your business was classified for revenues. But historically, if I look back 5, 10 years and I were to look at that business, what percentage of total revenues did that business run when the industry was in a more normalized condition? That's the first question.

[Brian Hanson:]

So David, I'll take the first one, and then I'll come back to the second one. The -- It's been an interesting history. We've been in the ocean bottom business for 2004, I believe. But we primarily entered the ocean bottom businesses and equipment provider from 2004 through approximately 2011 or '12. We provided equipment to 1 primary service provider out there. They ultimately went bankrupt, and we changed our strategy completely. We actually decided that the better strategy was to eat your own dog food and take the technology we developed and put it into a service model. So we went through a process over a couple of year period of buying in and then ultimately, buying out a service provider and owning him 100% and that was the birth of OceanGeo. And so really 2013 to 2016, we went through that process of putting OceanGeo into the market and participating as a service provider. And that technology was pretty relevant, and it did fairly well, but that technology now is dated, and it's not applicable to the current market. That revenue stream was pretty lumpy. It was -- the projects were periodic, and there were big lumps of revenue that came through, and we make good profits and good returns on them. So I can't answer your question exactly, other than to say, it's been sort of an interesting path we've gone through. What we're seeing today is, the service providers today are so -- there's -- the barriers to entry are very low, they can get access on an asset-light basis to ships and to nodal equipment and rent it. And so they were responding to these tenders, and they're doing it in a way that they're just taking -- they are dropping their price and they're getting very low returns on the work they're doing. It doesn't meet our return thresholds. And so the analysis we've done is, we feel that if we go into the market more broadly with our offering, not in an equipment sales model because we don't want to go and just say here is the cost plus 33% model, we want to take differentiated technology to the market and do it in a value-based pricing model that we will participate alongside in the success of the survey without having to participate in the procurement process with the E&P companies. We think we can actually get some really good returns. So that's a long way, and we're not answering your question at all.

[David Steinberg:]

Right. So let me, instead of me asking an another question that way, maybe it's a better way, can you give me a framework, the way I should look at that business depending on what the growth is in general, offshore businesses? Or is it an impossible task to -- just to complete unknown? I mean, you're talking about it growing and I know you can't give us a forecast, but there used to be significant margins in that business. So I'm trying to figure out does -- if you're looking at an industry question, how much goes to ocean bottom business, whether it's profitable or not? Is it a 20% growth business? Is it -- what looks like a normalized level for that industry? How do I frame that relative to you guys without you promising anything or forecasting anything, in particular?

[Brian Hanson:]

I will tell you, I think about it two ways, when I look at our business, I look at what we're going to do on the ocean bottom side, we will be incremental to our core business, which has good strong growth capability. So I think, a, it's an incremental opportunity; and b, what my objective is, is to grow a long-term sustainable recurring revenue stream, rather than have a one-off lumps of revenue and margin come through the business. So we're going to take our time, and we're going to be smart about how we commercialize each competent. I think 2018 will give us a little bit of experience around this, and tell us what we should really be able to expect in the long term. So I'll probably be in a better position in 12 months to answer that question than I'm right now.

[Operator:]

Our next question is coming from James West of Evercore ISI.

[Blake Gendron:]

This is Blake on for James. You guys broke down the interplay between the new venture opportunities from the data library from a timing perspective. But you made a comment about the initial new venture service versus the longer term. I guess, data library success is being 4x the revenue opportunity of the initial opportunity. Can you just talk about the interplay again between those 2? And maybe the timing with respect to 2019 sort of longer-term success follow-on work? And how confident you are that you'll actually get that work based on the conversations that you're having with clients?

[Brian Hanson:]

Yes. Let me clarify, I was referring to the E&P Advisory group, Blake. And the business model there is to be paid for -- through your service revenue work. That's sort of the consultancy work we do. So we get compensated for the service revenues when we do it. Then, we get success-based revenue based on the successful launch of their leasing rent. So when a block is launched, we compensated for the data packages we create, we get compensated relative to the success of the sale of the block. So we've done all of the work. What we're now waiting for is the launch of the license round and the placement of those blocks. And we feel that, that will be pushed into late '18, early '19. So once that license round occurs and those blocks are placed, and the oil companies write the checks back to the host government, that's when we'll see the success-based revenue associated with that work. And what our comment was, the success-based revenues, to put in perspective, will be in the range of 4 to 7x what the actual service revenue was for the consultant work that we did on it.

[Blake Gendron:]

Got it. Yes, that helps. And then moving over to the Operations Optimization segment, could you just frame for us, right now, the stands? How much of your revenue is stand-alone devices? How much of it is maybe a bundle between the systems and software? And then how much now is software stand-alone? And how do you see that evolving moving forward, especially as you roll out the prepackaged Marlin as sort of the software-only offering?

[Steven Bate:]

Just hang on Blake, I'm grabbing them for you. So the total revenue from that segment for the quarter was just under $10 million and about -- it's about half and half, may be 60-40 devices and software.

[Blake Gendron:]

Okay. And how much of that is bundled versus, I guess, you rent the devices stand-alone sometimes, you have an integrated offering where you kind of bundle the devices and the software? And then I'm assuming you are starting to generate revenues with software stand-alone as you roll out the shrink-wrapped Marlin package?

[Brian Hanson:]

Well, first of all, we actually don't bundle when we go to the customers. The customers pretty much pick our card. So the software, when we approach a customer on the software side of the business, it's different than when we approach them on the devices side. And keep in mind, it's a small handful of customers, right? It's not a huge universe and that's probably why we do that. We don't have to bundle them. When I look at two things when I look at the software business. The quality of the revenue stream and as we roll the Marlin -- the software version of Marlin, it's going to behave like a traditional software business, which is a very high-margin business, and we're going to do it in a way that's recurring revenue. I can't tell you how much I expect because that gets a little bit too close to guidance. But I think that side of the business has a tremendous -- tremendously more potential than the devices side of the business simply because of the quality of the revenue stream. But that being said, the devices side of the business has nice prospects to outside of seismic, and I can see it taking -- I can see it over a 5-year period diversifying on and quite nicely outside of the E&P sector totally.

[Operator:]

Our next question is coming from Barry Bergman of Alba Investments.

[Barry Bergman:]

Can you give us an update on that Schlumberger litigation issue and maybe you said it at the beginning, I got on a little bit late? And I also understand if it's outstanding, you might not be able to talk that much about it.

[Brian Hanson:]

Actually, I appreciate the question, and I tell you why. I've got some prepared remarks because it's an important topic, but it's complex. So I will spend a little time on it. I'd also like to point you to our website where we posted a detailed press release on it and a flowchart with all the possible timing and the proceedings. There are number of avenues that this case could take. The first is the argument of the Supreme Court, the second is the preserved claim in the Court of Appeals that ION has and the third is the inter partes review process. It's our opinion that the Court of Appeals got this right, but even in the event the Supreme Court sides with WesternGeco and remands the case back to the Court of Appeals, they've got a tall hill to climb to win this, let me explain. The issue on appeal to the Supreme Court is, whether WesternGeco can recover loss profits from ION for surveys performed by our customers that occurred entirely outside of United States. In most areas of law, U.S. courts will not fine U.S. laws to apply to foreign activities adds in a very clear indication from Congress that they were intended to apply to foreign activities. The Supreme Court has said numerous times that this strong presumption is especially relevant in patent law. The position that WesternGeco wants the Supreme Court to adopt is that if a party is found to have infringed a patent under section 271F of the patent statue, which prohibits export of components of a patented product for use abroad that the exporting party is liable for all loss profits, even if the ultimate use of the product abroad didn't infringe any patents in the U.S. or anywhere else. This would be a real sea change in the law of patent change damages and would cause some really absurd results. For example, if Company A exported a hammer to a customer that -- and that customer used the hammer to build houses in Tanzania, where there is no patent protection and Company B convinced a jury that their U.S. patented method of building a house require the same kind of hammer, Company A could be found liable for loss profits associated with an entire town built in a forest jurisdiction using that method versus a reasonable royalty on the sale of hammers. You could imagine how egregious this would be and the tremendous damages that U.S. companies would face would provide a strong incentive for U.S. hammer manufacturers to move their operations abroad. So a change in law would have huge ramifications. Why would company seek patent protection and force jurisdictions, if U.S. patent law was that far-reaching. But no statutory limitations on the availability of worldwide damages, businesses that choose to do the manufacturing in the U.S. would be subject to the wins of a jury as to whether an active infringement caused worldwide damages. Bottom line, U.S. patent laws applicable to the United States. If you want patent protection in a foreign jurisdiction, you need to file report in that foreign jurisdiction. We think that the Court of Appeals got it absolutely right, and we are looking forward to making this case to the Supreme Court. And if we don't win outright in the Supreme Court, that's not the end of the road for us. We've additional avenues of attack that could extend into 2020 and beyond. Even if the Supreme Court agrees with WesternGeco, the case will be remanded back to the Court of Appeals, where we preserved another solid argument. The Court of Appeals ruled in our favor with respect to whether loss profits attributable to foreign, non-infringing activities recoverable. In addition, there is case law that supports the requirement that ION would have to be a direct competitor to be liable for loss profits. For example, ION would have to be a house builder, not a hammer manufacturer. We argued in the Court of Appeal that ION was not a direct competitor with WesternGeco in the applicable market. ION wasn't a direct competitor of WesternGeco for the surveys and question. ION was selling a product, Digifin, to contractors that conducted surveys for E&P companies. WesternGeco was a contractor that wanted to conduct those surveys for the same E&P companies. That makes them a direct competitor of our customers. Not our direct competitor. The Court of Appeals didn't rule on this because they rightly, in our opinion, determine that loss/profit were not available whether or not we were direct competitor of WesternGeco. We weren't a direct competitor, and we have preserved this argument so the Court of Appeals is required to decide this issue in the event the Supreme Court overturns the victory, and we believe the current custodian favors our argue. In addition, secondly and concomitantly, you probably saw in our press release that we engaged in a parallel proceedings against WesternGeco arising from the procedure known as inter partes review. And IPRs in administrative proceeding in the U.S. Patent and Trademark Office that allows any party to challenge the validity of a patent. This relatively new process was not available to us when WesternGeco sued us in 2009, but we were able to attack on and do an IPR proceeding initiated by customer of ours in 2014 against WesternGeco. The patent in trademark officer ruled in 2015 that forward the 6 patent claims that WesternGeco prevailed on our case against this in the District Court should never have been patentable. WesternGeco appealed this ruling to the Court of Appeals. And having just finished our arguments, we expect the Court of Appeals to rule on this case late this quarter or in Q2. While the District Court didn't assign particular values to any of the 6 claims, we believe that the bulk of any damages assessed to gain assess are attributable to canceled patent claims. Of the two claims that were not cancelled, one, was a claim pertaining to turning vessels between acquisition lines, and the Patent and Trademark Office found that they were non-infringing alternatives to accomplish these terms; the other remaining claim was a system claim that we don't believe should have formed apart of a loss/profit calculation. In the event that we do not prevail in the Supreme Court or in the Court of Appeals, on our direct competitor claim, we intend to forcibly challenge the word of loss/profits on the basis of the bulk of WesternGeco's damages are attributable to patents that should never been issued. This litigation rather be resolved in the near term in our favor or could last for multiple years potentially beyond 2020. And for your reference, we have a time line posted on the Investor Relations section of our website. Hope that helps.

[Barry Bergman:]

Can you hear me? I have one other question. How much of legal fees are you guys paying a year to defend yourselves on this?

[Brian Hanson:]

I don't think I can answer that question.

[Barry Bergman:]

Okay. Because it's not public -- it's, for any reason, in particular?

[Brian Hanson:]

Yes, we just don't breakout that level of detail in our financial disclosure.

[Operator:]

Our next question is coming from Phyllis Camara of Pax World.

[Phyllis Camara:]

One question -- and thanks, again, too for breaking out the whole patent litigation issue that was one of my questions. And I was looking on your website, and actually, it's pretty good spreadsheet or chart. So I appreciate that information. Can we go back to the ocean bottom business though and talk about, so you had no revenues from ocean bottom in 2017 and you sort of change things around a little bit so that it's more software rather than devices or equipment? How does that -- I think you mentioned that some of that work now was no longer -- or some of that equipment was no longer really relevant in today's technology. Or are you going to have to spend more money to update software, if we could get a quantification of potentially how?

[Brian Hanson:]

Let me clarify. Let me clarify for you, Phyllis. I think mixing a couple of things up here. Our legacy system that we actively deploy during ocean bottom systems was called BSO. That system has run its course. It is now end-of-life, and it isn't applicable to the types of surveys that are being designed today because the types of surveys are much larger in size and scale so they require a lot more equipment and that's why systems are moving from cable-based systems like BSO into the nodal-based systems. The new technology that we announced in 2017, 4Sea, is a nodal-based system. And it is not only equipment, it's software, it's processing and imaging, it's quality control, it's a fully integrated approach doing ocean bottom work. We are through the majority of the development of that system. So it's now -- but what we've made a decision to do is to break up the components whether it's equipment, whether it's software, whether it's imaging. And we're going to offer those components broadly to the market, to OBS service providers and get property compensated for the recurring revenue-type model versus bidding against them on projects and doing it in the crew model, and the difference is very simple. If I go and -- if I want to roll a crew out, I've got to invest $60 million to $80 million in capital. I've got to contract with vessels, it's a high fixed cost business, it's capital-intensive and I'm out there competing against too many service providers today who are not focused on returns but are focused on low bids on when you look at the natural procurement process of the E&P customers. So it's a bad business from the supply perspective. So what we're doing is stepping back and saying, we'll break up the components of our system offering them to all the service providers, but we'll do it in a way that we get properly compensated outside of the E&P procurement process, and it will enable the service providers to be much more competitive, and they'll do what they always do. They'll just drop the price further to end the tenders. So we'll let them play that game with the oil companies, and we'll sit back and we'll develop a nice quality revenue stream.

[Phyllis Camara:]

Okay. Does that mean your basic customer base has changed then from with the way you were going to market to the way you're going to market now?

[Brian Hanson:]

Yes, we were participating in tenders with oil companies and competing with these service providers. We are going to flip that around, and we're going to enable the service providers with our technology and let them go participate in the tenders.

[Phyllis Camara:]

Okay. Okay. And so you will be competing then with the groups more like the Schlumberger or you will be selling to -- I'm sorry, more the Schlumberger's or the Halliburton's or others who are doing that type of work with the E&P companies?

[Brian Hanson:]

Well, yes, Halliburton is not in the space, and Schlumberger just announced they're exiting all acquisition services. But there are companies out there -- there is a half a dozen ocean bottom services companies out there, and they will be our customers. There are customers today. They're already our customers. All these guys run on our software to execute those surveys already. So this is just a natural extension and expansion of the offering to them.

[Operator:]

[Operator Instructions]. Our next question comes from Garrett King of Truffle Hound Capital.

[Garrett King:]

I just had a question about the color you gave regarding the next quarter as in line to slightly exceeding. Given that the backlog has increased about 15% year-over-year and the other indicators that you mentioned that were looking positive, is there something I miss in regarding why Q1 shouldn't be a little bit stronger?

[Brian Hanson:]

No, not really. It's just a really a hard one to call. I've been here for 12 years, and I've seen Q1s all over the board, so I'm just absolutely gun shy. And I know that our customers are always scratching their heads at this time of the year, trying to figure out what's the budget allocations are going to be. So I just air on the side of caution.

[Operator:]

At this time, I'd like to turn the floor back over to management for any additional or closing comments.

[Brian Hanson:]

Well, thank you for taking the time to attend our conference call. And we look forward to talking to you on the next one.

[Operator:]

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.